What is a Decentralized Autonomous Organization (DAO)?
We're used to central governments in countries, businesses, sports clubs, and schools. But with people working more and more remotely, is there an alternative?
ByRick van Melis — Explainers
6 min read
Whether it's a government agency or a private company, every entity we call a service provider has a governance regime that gives the customer a certain level of visibility and discretion regarding how they are served. While most of these modern entities are centralized, with a specific actor or set of actors taking responsibility for different actions, there's a lot that can still go wrong, transparency and accountability are often lacking.
So how do you enable more stakeholders to remain informed and have a say in how they are served? These are the questions that a decentralized autonomous organization (DAO) attempts to answer. With over 978,000 people in the blockchain space being members of a DAO, this concept is steadily taking off.
Furthermore, the top 20 DAOs manage roughly [6 billion in June 2021. With that in mind, let's define a DAO, discuss the value it offers and the progress this concept has made since inception, along with the challenges faced too.
What is a Decentralized Autonomous Organization?
A decentralized autonomous organization is an entity covering a set of rules governing the transactions between its members, with no central authority or intermediary involved. Typically, a DAO exists on a blockchain and utilizes smart contract technology to self-execute members' decisions.
The members behave by creating proposals, communicating about them over channels like Telegram and Discord, reaching a consensus by voting on the proposals, and autonomously executing smart contracts that enforce decisions.
DAOs often mirror a lot of real-world organizations, and the common types include corporations, startups, foundations, unions, joint ventures, cities, venture capital funds, and other communities.
The relevance of DAOs
Irrespective of how much you may dislike the status quo where a small group of people often make unfavorable decisions for a larger group, many people are still comfortable with prevailing governance systems. So how exactly do DAOs revolutionize the way we transact with each other?
Well for starters, because a DAO exists on a blockchain, it brings immutability to transactions (read our previous article on blockchains). Ordinarily, when dealing with a bank, lands office, a university, or some other kind of institution, there's usually a chance that a record can be altered by an internal or external actor.
However, on a blockchain, every transaction is validated by the computers needed for consensus and can't be changed. Furthermore, once an agreement has been finalized, parties have limited room to renege since the transactions involved will be executed automatically once the set conditions are met.
Secondly, DAOs facilitate more equitable participation in the economic activities they govern. For conventional businesses, the most crucial decisions are made by a manager, a group of directors, or some other executive.
Shareholders also get to vote on who will be making these decisions and by extension, what direction the business will take. Oftentimes, their self-interests will get in the way of rollouts for new products and services that customers want, and also leave discriminatory premiums and other prerequisites on existing product and service offers.
DAOs give people a chance to vote on important product features, rules, and resource allocation. Anyone who holds units of the organization's governance token can part with a portion of their holdings to vote on various proposals.
Be it the methods that government agencies use to choose who gets to be an accredited investor, or the approach that financial institutions use to decide who can borrow money or earn interest on their deposits, bias and other unnecessary considerations can skew the process.
DAOs essentially work towards enabling more people to participate in a venture from the get-go and continuously influence decisions on how much they can benefit from the said venture.
Thirdly, by eliminating the need for a trusted third party in a transaction, DAOs can significantly reduce the costs incurred by either party in this transaction. Whether it's a bank using your deposits to create credit, or an exchange linking a buyer and seller, there's usually a fee involved.
However, the bank most probably won't tell you the rate exactly how much they'll spend on getting someone to borrow what you deposited, and how much they'll make after recouping the cost. In the same respect, a centralized exchange won't disclose the exact amount they spend on getting someone to buy currency units or securities from you or sell them to you.
DAOs attempt to replace these bureaucratic middlemen with more efficient and reliable technology that peels back the covers on a transaction and subsequently offers the service at a rate much closer to what either party desires, with occasional room for negotiation.
Examples of successful DAOs
DAOs have massively exploded over the last 2 years. According to DeepDAO, the top DAO, Uniswap, manages a treasury of over USD 3 billion. In a future article we'll go more in-depth about this growth, but here are a few other examples of DAOs that are getting it right so far:
Miami Tech Runs
This DAO brings together key players in Miami's innovation ecosystem through sports. Its public members' directory includes founders of startups like Upstream, Brud, and QuickNode. The DAO has also attracted people from prominent investment groups such as Andreessen Horowitz, Flamingo Capital, and Capital G.
The DAO has organized several basketball games and played at other exclusive venues. The members also intend to venture into tennis and yoga soon.
Mean DAO is another DAO building the bridge between traditional banking and decentralized finance (Defi). Currently, it is just shy of 17,000 active members and recently announced a capital raise of USD3.5 million led by SoftBank's SB Opportunity Fund, DeFiance Capital, and Three Arrows Capital.
Mean DAO is already serving over 31,000 individual accounts with 1,800 daily active users, offering access to its Money Streaming and Dollar Cost Averaging programs with an unprecedented level of Defi automation courtesy of its Mean Protocol.
Other examples of successful DAOs include:
- Gitcoin, A software development service DAO overseeing bounties, tips, hackathons, grants, and other activities that have already amassed over $56.2 Million of development and 311,688 developers; Decentralized Community Investment Protocol (DCIP) is a Netherlands-based community that does as the name implies. Currently, there are over 6.000 active members, and it manages over EUR 500,000 in crypto assets;
- PrimeDAO, A collective of Web3 builders developing next-generation coordination tools and currently in a mutual grant agreement with Gitcoin worth USD 250,000;
- Klima DAO Accelerating the price appreciation of carbon assets to force a shift towards low-carbon technologies and carbon-removal projects in a more profitable manner;
- PleasrDAO, Dedicated to collecting culturally significant NFTs.
In conclusion, DAOs are still in their onset, but as people get more innovative at creating them and making them more user-friendly and less technically intricate, many will rush to be involved. In our next article about DAOs, we'll discuss how someone can get involved and how you can create your own.
In the meantime, to learn more about building DAOs, DApps, and blockchain development in general, read our other articles or contact us through our website at https://byont.io.